The Structure of a Hedge Fund

There are many ways to structure hedge funds. The single hedge fund portfolio manager is a common structure and includes a fund administrator, prime broker, custodian and traders. In this setup an investor would place money with the L.P. (Limited Partnership) which is then reported to the fund administrator for calculation of net asset value (NAV). The L.P. (hedge fund) then sends these funds to the custodian who basically monitors margin requirement for trading purposes. The prime broker can then execute trades ordered by or on behalf of the portfolio manager.

The personnel in a hedge fund is vital to its success and includes analysts, traders, a VP, a Director and of course the partners or investors. The role of a hedge fund analyst is to seek and research investment ideas based on the strategy of the fund. If the strategy, for example, is Event Driven then the analyst would spend their time researching distressed companies, news items or merger arbitrage opportunities.

A hedge fund trader job can be one of the highest paid in the entire organization. The trader has expertise in knowing when, how, and into what exchange the fund should buy and sell assets. Great traders have extreme discretion over the deployment of capital into the open market.

Within the framework of a hedge fund, the Vice President is normally associated with risk management and is responsible for the overall exposure of the portfolio. Whereas the Director is associated with operations and maintains a high-altitude view of the total enterprise from legal and compliance to prime brokerage and investment banking.